Every blockchain needs a transactional currency. In some cases, all it does is facilitate payments and serve as a store of value, like Bitcoin. In other instances, the token can be used to execute many other useful applications, like Ether.
Ether was launched in 2015. Before then, all the world had was Bitcoin, the cryptocurrency of the future. However, it had been designed to execute only one function – be a decentralized means of payment. The blockchain was the first in the industry, so its functions weren’t expansive.
Vitalik Buterin is a programmer who saw right through this and developed a cryptocurrency called Ethereum. You can use this blockchain to execute basic payments and transactions, and would be amazed at the ton of other things it offers.
Ether is the transactional token for the Ethereum blockchain. It’s also used to support the development of the network, through miners and DApps. Ether and Ethereum are used interchangeably, but you’ll understand the difference if you stick around.
How is new Ether created?
You need to understand what Ethereum and Ether are before you’ll be clear on how Ether is created. In other w0rds, what drives the Ethereum blockchain, and why is there even a need to create more Ether?
So, what exactly is Ethereum?
It is a decentralized open-source blockchain project that was designed to facilitate decentralized payments to and from anywhere in the world. This is made possible through smart contracts.
This is one of the reasons Ethereum remains one of the leading blockchains, despite the many other futuristic blockchains are emerging.
Smart contracts were pioneered by the Ethereum network, and that’s how digitalized transactions are executed without a third party. That’s why miners, which you’ll learn about, are so important. They write codes, which ensure the safety and security of the transactions you engage in on the network.
That’s not all. It also offers its network to other cryptocurrencies and individuals interested in building their own decentralized applications.
Games and financial apps are run on the Ethereum blockchain too, and it’s even the hub for the revered NFTs. NFTs are a story for another day; but you should know that they’re non-fungible tokens.
These are unique and irreplaceable digital artworks or assets; it really is another world on its own.
Now, this is where Ether comes in. These services aren’t free, and everyone using the network must pay a fee for the computing power.
It may be the cryptocurrency of the Ethereum blockchain, but Ether is much more than that. Compared to the typical digital token, Ether offers more value to users and its network.
Without it, the storage of financial records and consumer data would be a hassle, if not impossible.
Whether you’re using the Ethereum blockchain for business or personal purposes, you need to pay with Ether. Even developers who create codes to secure the network are paid in this token.
Why are new Ether created? It’s the second largest cryptocurrency according to market value, and many people are executing services on the blockchain. Since they need Ether to pay for anything, they would need to purchase it with fiat money or another digital asset.
It’s also a store of value, so there are investors in the market. As everyone clamors to buy this token, the value increases.
Do you recollect that the Ethereum blockchain is also a platform for other cryptocurrencies? Even they must pay for their transactions.
As the use-cases for Ether increase, so does the demand. This means more would need to be created, and there are miners for that. New Ether is created through mining, an incentive every cryptocurrency blockchain uses to secure their network.
On the Ethereum blockchain, mining requires solving complex mathematical problems, which would supply a proof-of-work for the network.
Proof-of-work is the mechanism that allows users to execute their financial transactions without a third party. Since it’s decentralized or ungoverned, it would be subject to attack; so how does it stay impenetrable?
It’s through Ethereum mining, and you’re about to learn about that.
How does Ethereum mining work?
Ethereum mining is required to validate transactions on the blockchain, among other things. The Ether that you hear about today, is created when Ethereum miners fulfil their duties on the network; it’s a sort of reward system.
Mining in cryptocurrency is just like mining in real life. Just as they mine gold, diamonds, and other precious stones, that’s how digital assets are mined.
However, the process is a little different. The job of a miner is to validate smart contracts on the Ethereum blockchain. There’s an incentive, though.
A decentralized finance project like Ethereum is still standing strong because its blockchain is strong and fast; a new block is added every five seconds. As a way to ginger morale, each miner gets five Ether coins when their blocks are added to the network.
And even if your block doesn’t get selected for validation, you’ll still be rewarded.
Now, this may seem like an easy way to make money; considering the value of one Ether. And remember, a block gets put up every five seconds.
Fortunately, anyone can become an Ethereum miner; the computationally difficult puzzles can be solved using the right skill set, software and hardware.
There are three ways to mine Ether
The first is pool mining’ it’s the fastest and easiest option. Here, you and a group of other users of the Ethereum blockchain agree that the first person to find the secret number in the mining pool shares the reward with other members.
This method increases your chances of earning something, even though it’s less when you’re numerous in a mining pool.
Again, anyone can join a mining pool, but there are three factors you should consider. There are many mining pools on the Ethereum blockchain, so considering the pool size, pool fee, and minimum payout will help you choose the most suitable one.
Why consider these factors? Well, the pool size is the number of people in the group. The more you are, the less your reward would be. But that also means one of the other people in the group will crack the puzzle and win you something, no matter how small.
The pool fee is the amount you pay to use the mining pool. It’s best to choose a cheap percentage, often between one to three. Zero-percent fee pools are unstable because they rely on donations to function.
The minimum payout is also important because a high one will leave you stuck with your mining pool for a long time. you’ll be unable to withdraw without meeting the requirement.
And if you cannot withdraw, there’s no way you’re going anywhere. Choose one with a low minimum payout, so you can get paid more often and have the liberty to change mining pools anytime.
Mining alone is also an alternative. Here, you’ll use your hardware and software resources to crack codes and create blocks for the blockchain. However, this method consumes a lot of energy, is noisy, and may cause ventilation issues.
The final option is cloud mining; again, anyone can partake in it. It entails paying someone else to mine your Ether. There are cloud mining services that invest in the hardware and software and pay the energy bills required.
If you have a gaming PC, you can learn how to mine Ethereum, or join a mining pool.
Miners exist to solve computational problems and protect the system from hackers. They also validate transactions which won’t be added to the blockchain if there’s any chance of inaccuracy. This is called proof-of-work.
So, how does Ethereum mining work?
It begins when a user makes moves to start a transaction on the Ethereum blockchain using a private key. A node is what passes the message to the validators or miners who then begin to verify the validity of the transaction.
With many people working on confirming the legitimacy of the transaction, it’s little wonder each one gets executed as soon as five seconds. When the verification is completed, the successful miner earns the gas fee.
They must broadcast that they’re completed the block, which other nodes will hear about and add it to the blockchain.
Any new node that joins the Ethereum blockchain must download the blocks sequentially.
What is Ethereum gas?
As we’ve mention already, the Ethereum blockchain runs on a fuel and a cycle of some sort. Miners need to secure the network and validate your transactions; it’s a significant task that’s made more interesting with incentives.
When you pay gas fees, you’re paying a fraction of the amount that’ll be paid to Ethereum miners. Essentially, these programmers determine the price you’ll pay for the transaction you’re looking to execute.
In other words, the miners on the network determine the demand and supply for the price of gas. Remember how much energy it consumes?
The brainpower that’s required is also worth mentioning, among other factors. These don’t justify why the prices fluctuate, but at least they explain them.
If the number of people who need to execute transactions on the blockchain is incredibly high, it increases the demand on the miners. And they increase their fees.
The amount you pay is called the gas fee because you’re essentially paying the energy fee for the validation of your transaction on the network. If you want to send Ether to someone or facilitate an online payment with the token, you’ll be charged a percentage.
It’s like employing the miners to validate your smart contract. But if the system doesn’t offer to pay them enough, they turn a blind eye.
The Ethereum project plans to upgrade to a proof of stake system. It’s different and more futuristic because users of the blockchain stake their Ether instead of competing to validate the transactions.
You can become a validator through a random selection process, and the amount you’ll make will depend on the amount of Ether you’re holding.
Proof-of-stake doesn’t consume as much energy because it doesn’t require as much hardware. Instead of investing multiple hardware into Ether mining, a single company can purchase plenty tokens and dedicate the job to a few super computers.
Gas and gas limits
The gas fee is the amount you pay when trading Ether. It exists to separate the computational cost from the value of the token, to ensure a stable method of payment.
Gas is the unit of measurement for the energy used to run a smart contract or decentralized transaction. The amount is driven by supply and demand and the complexity of the transaction to be executed.
For instance, if you’re just sending tokens to a friend’s wallet, you won’t pay as much as if you are buying a nonfungible token because the latter is more complex.
The price is a fractional part of Ether, and is often called the Gwei. There’s a smaller unit called the wei; a billion of it make a gwei.
Fortunately, the Ethereum blockchain offers many options to users who desire to execute a transaction. You can choose the priority rating; and of course, a higher one means you must be willing to pay less.
The current gas prices can be discovered at the ETH gas station, and they’re grouped into six. Your wait period can be seconds or minutes, depending on how much you’re willing to pay.
Ethereum miners will prioritize validating the ones with the higher prices, which means you can jump the line by paying more.
Speaking of which, there’s something called a gas limit. And it’s the literally maximum amount you’re willing to pay for a transaction.
The average amount for a transaction on the Ethereum blockchain is 21,000 units, but you’ll have to pay more if you’re executing more rigorous commands.
Gas limit exists to protect you from paying too much if there are errors or bugs in the smart contract. The transaction just won’t work until things are back to normal.
If you want to make a transaction with insufficient gas, the miners will record it as failed on the transaction because you’ve not satisfied them. as such, your Ether will remain in your wallet.